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Sunday, December 20, 2009

The trading hours controversy

Shifting away from central planning

Traditionally, Indian socialism has involved government control of all aspects of financial products or processes. As an example, government specified the time of day at which trading starts and the time of day where it stops. The RBI committee process on currency futures and interest rate futures specified that trading must start at 9 AM and stop at 5 PM.

In most areas of the Indian economy, goverment no longer controls the economy in such fashion. The government does not specify what time a shop opens or closes. There was a time when the Indian government did not permit the use of aluminium for making cans of soft drinks. A large fraction of such meddling in the economy has been dismantled (though not in finance).

A few weeks ago, SEBI came out with a liberalised policy: Exchanges could open anytime afer 9 AM and stop trading anytime before 5 PM. If NSE or BSE opt for longer hours, securities firms will face the decision about the time at which the shop opens for business and the time at which it closes. Staying open longer will involve somewhat higher costs and in return will yield somewhat higher revenues. Each shop will make its own decision about choosing a starting and a closing time.

What do we gain?

If Indian markets to be open from 9 AM to 9 PM, there are two benefits. First, consumers should have maximal choice on when they can achieve their trading needs. Recall that internationally, many grocery stores choose to stay open for 24 hours a day.

Second, in the late evening in India, the ADR market opens in the US, and it is important to link up the closing Indian prices to the opening US prices.

How will exchanges and their members cope?

If securities firms have to stay open for 12 hours a day, this will require process modification, including multiple shifts for certain employees.

These changes might seem burdensome. But similar changes have taken place before. With floor trading at the BSE, trading only lasted for two hours a day; but when NSE came along, trading moved up to 5.5 hours a day. Members doing commodity trading are already running to almost midnight.

Securities firms and exchanges will need to change their process design to achieve longer hours. If a securities firm has to trade from 9 to 9, this will require two shifts. The first shift will probably come to work at 8 AM, and stay till 3 PM, while a second shift will probably come to work at 3 PM and stay till 10 PM. Some firms will find that this does not make sense for them and they will choose to only keep their shop open for shorter hours.

The operation of securities markets in India is held back by infirmities of the payment system. A shift to longer trading hours will encounter frictions owing to problems with payments.

At first, clumsy solutions will be found because of problems of the payments system. But at the same time, when the industry demands more from the payments system, we set ourselves on the course for deeper surgery of the payments system. In this 21st century, we can and should have a payments system which processes 100,000 messages per second and runs for 24 hours a day. When the industry complains enough about the infirmities of what is in place, the existing payments system will be questioned, which could ultimately lead to improvements in the payments infrastructure.

A messy situation?

NSE and BSE have gone through a series of announcements. First, BSE said they would start at 9:45. Then NSE said they would start at 9 AM. Then both said they would think about this after the holidays.

These activities seem messy and confusing in the public eye. These tactical details are an inherent part of the market economy. When government control is withdrawn, and a license-permit raj is scaled down, we go from a tranquil and stable environment -- the silence of a graveyard -- to a dynamic environment where firms are thinking and reacting. This should be welcome.

Doing more on moving away from central planning

SEBI needs to move forward on many fronts in terms of getting away from government control of product features. There is no reason to restrict exchanges to the zone from 9 to 5. Similarly, many other product features on the derivatives market need to be decontrolled: what underlyings to use, whether cash settlement or physical settlement, the expiry dates, the contract sizes, etc. Government control of these product features is as legitimate as government control over the design of a bicycle.

There is a difference between regulation and control. The role of government is to specify pollution standards for cars and to require seat belts or airbags. It is not to design cars.

3 comments:

Comparing an exchange to a grocery shop is being simplistic. The exchages should rather try and see why only 10 million people are into stock and why delivery % is low. This kind of one upmanship is aviodable.

Are the exchanges supposed to be 24hr casino. let us have a debate on that ???

I have been reading your blog for about a year now and have generally agreed with the views. But on the trading hours issue I cannot help but comment.

Recall that internationally, many grocery stores choose to stay open for 24 hours a day.

The 24 hour concept in grocery stores is perhaps due to too much competition rather than choice. It is economically wasteful (electricity and other resources), stressful for employees and does not provide extra revenues. An ideal time maybe more like 8 AM to 10 PM for grocery stores. But then there will be another store that will remain open till 11 PM and get more customers. So there is no option for them but to remain open all the time, unless the government / regulator stipulates maximum timings.

It is important to link up the closing Indian prices to the opening US prices.

The ADRs of some indian companies are very liquid and some of them are affected significantly by the events in US. But extension of the entire market timings for a few stocks is an overkill. A few index futures trading for long hours would do the task of price discovery and hedging in case of important events.

I think this is BSE getting more active to face NSE and newer stock exchanges. Both the Exchanges have the technology, if you hear the voices its from the brokers...the winners will obviously be the private bankers and PSU banks who have adopted technology. With international brokerages and Investment houses setting shop here and with Algo Trading becoming an alternate mechanism, I say bring it on....we need to get more aggressive and increase our market depth and if this will do it .... so be it....

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